You’re Rehired? New California Law Prohibits No-Rehire Provisions in Settlement Agreements

Upending the longstanding practice of employers including no-rehire clauses in agreements resolving employment disputes, California Governor Gavin Newsom has signed a new law that will prohibit such provisions in employment settlement agreements.  Assembly Bill 749 (AB 749) is another #MeToo-inspired bill, following last year’s wave of legislation surrounding prohibited harassment in the workplace.  Under AB 749, with limited exception, all no-rehire provisions in employment settlement agreements entered into on or after January 1, 2020 in California will be void as a matter of law.

Background

It is common practice for employers to settle claims from former employees with a settlement agreement that includes a no-rehire clause.  Similarly, many employers and employees mutually agree to a parting of the ways, with a severance agreement that often includes a release of all claims and a no-rehire clause.  These provisions vary in scope, but generally provide that an employee’s subsequent application for employment with the company will not be considered, and if the employee is hired by chance, their employment can be automatically terminated.

In opposing AB 749, the California Chamber of Commerce argued that the new law was unnecessary because case law establishes that excessively overbroad no-rehire provisions are already void under California law under Business and Professions Code section 16600.  California Business and Professions Code section 16600 provides that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” 

AB 749

Proponents of AB 749, including its author, Assemblyman Mark Stone (D-Monterey), argued that the bill was necessary to protect victims of workplace harassment.  “The no re-hire clause punishes the victims of discrimination or sexual harassment from continuing employment while the offender remains in the job,” Assemblyman Stone said in a press release.

AB 749 creates new Code of Civil Procedure section 1002.5, which provides:

An agreement to settle an employment dispute shall not contain a provision prohibiting, preventing, or otherwise restricting a settling party that is an aggrieved person from obtaining future employment with the employer against which the aggrieved person has filed a claim, or any parent company, subsidiary, division, affiliate, or contractor of the employer.

The law defines an “aggrieved person” as anyone who has “filed a claim against the . . . employer in court, before an administrative agency, in an alternative dispute resolution forum, or through the employer’s internal complaint process.”  Opponents of the bill, including the California Chamber, have objected to how broadly it defines an aggrieved person for purposes of the law’s coverage.

AB 749 does not eliminate an employer’s and current employee’s ability to enter into a severance agreement.  Additionally, the law does not require that an employer rehire prior employees if the employer has made a good-faith determination that the person signing the release engaged in sexual harassment or committed sexual assault, or if there is a legitimate non-discriminatory or non-retaliatory reason for terminating the employment relationship or refusing to rehire the person.  AB 749 does not, however, provide guidance as to how it will be determined if such a legitimate, non-discriminatory or non-retaliatory reason exists.

Next Steps for Employers

There are several things California employers should consider doing to prepare in the two months before AB 749 goes into effect. 

The new law specifically prohibits no-rehire provisions in settlement agreements “entered into on or after January 1, 2020.”  Accordingly, to the extent practicable, employers can consider settling pending cases or claims within the current calendar year while no-rehire provisions are still enforceable under California law.

Employers may also want to update their performance review and documentation practices in light of AB 749.  When an employee is terminated for performance issues, those problems are not always reflected in that employee’s personnel file.  But many employers include on their employment application form a question inquiring if the applicant has ever worked for the company before.  If the question is answered in the affirmative, the employer is within its rights to review the applicant’s prior employment history and decline to rehire on that basis.  Notably, if the applicant’s prior supervisors engaged in “grade inflation” and gave the individual high performance evaluations or otherwise did not include performance problems on the applicant’s reviews, it could be more difficult to justify a refusal to hire the second time around.  If the applicant was evaluated honestly while previously employed, then the employer will be in a better position to support a refusal to rehire.

California employers should review the language in their standard settlement and severance agreements.  Starting January 1, 2020, no-rehire provisions will generally be void as a matter of law unless an employer has a good-faith belief that the employee engaged in sexual harassment or committed sexual assault, or there is “a legitimate non-discriminatory or non-retaliatory reason” for termination or refusal to rehire.  Employers can consider explicitly incorporating such language in their settlement and severance agreements in order to include a no-rehire provision in those circumstances.

Finally, when settling disputes with former employees, or negotiating severance agreements with current employees, employers should be prepared for the new reality that these employees could reapply for employment the day after cashing their settlement checks. 

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.